What Are Accounting Reconciliations?

Schedules Validating Account Balances and Financial Totals - Key Internal Controls - Evidence as to the Completeness, Accuracy and Integrity of Financial Records - Windows on Risk

> Accounting Dictionary   > Accounting Reconciliations

Where would accountants be without Accounting Reconciliations?

  • at home playing the X-Box?
  • spending time with the family?
  • away on a relaxing weekend?

The reality is that Reconciliations ('Recs') are the bread and butter of financial control - and financial control is the bread and butter of the accountant.

Without proper reconciliations, accounting and reporting become meaningless or, at best, fraught with risk.

funny accounting poster

In short Recs are important - very important.  So pay attention!

About Accounting Reconciliations

What is an accounting reconciliation?

An Accounting Reconciliation (a 'Rec') is an accounting schedule that supports and validates an account balance (or other accounting total) using data from two sources.

The process of reconciling is a core internal financial control evidencing the completeness, accuracy and integrity of accounting records.

To be valid it should be supported by lists of items, transactions and explanations (audit trail) and be signed off by both the preparer and a line manager or supervisor (integrity and segregation of duties).

Reconciliation schedules are key pieces of evidence required by auditors when assessing audit risk and scope and to support their audit opinion.

accounting reconciliation template sample

Example of a Simple Reconciliation Layout

The goal is to show that you can get from System A to System B - with all steps fully supported - and have no variance.

Note: the variance here is zero - accounting heaven!

But it may not always be.

Some accounts may never reconcile 100% (eg. high-volume low-ticket bank recs) and a judgement call needs to be made as to materiality / risk - welcome to the real world of accounting!

Types of Reconciling Items

The types of items that could be in the 'Reconciling Items' lines include:

  • normal timing differences ('cut-off') eg. month end bank receipts posted to ledger but yet to clear bank; or cheques sent out but yet to be presented (cleared) to the bank.
  • posting and coding errors and omissions - eg transactions posted to the wrong account in the GL
  • system issues - eg. transactions incompletely processed and waiting for the IT team to fix
  • backlog issues - these could be legitimate transactions on one system but which the processing teams have yet to process onto the other system

Each category of items will give insight into different aspects of risk, inefficiencies and control weaknesses. The trick is to get to the bottom of these during the next month and get them resolved else it's deja vu next month end!

What accounts or data gets reconciled?

The most common accounting reconciliations are those performed on key Balance Sheet accounts in the General Ledger (GL):

The most important of these will usually be:

Bank Reconciliation  - the NUMBER 1 CONTROL - Reconciles the Bank Statement Balance (ie. the bank's own records) to GL Balance.

Trade Debtors Reconciliation - Reconciles the Total of the (Aged) Debtors Listing in the Sales Ledger to the Trade Debtors Control a/c in the GL

Trade Creditors Reconciliation - Total of the (Aged) Creditors Listing in the Purchase Ledger to the Trade Creditors Control a/c in the GL

Fixed Assets Reconciliation - Total Cost/Value of Fixed Assets in the Fixed Asset Register to the GL Balance/s.

Stock Reconciliation - Total Cost/Value of Stock in the Stock Records to the GL Balance/s.

Other reconciliations may include a Vat Turnover Rec (Net Sales as disclosed on VAT returns to the Turnover reported in the Financial accounts). This is a key completeness check - pre-empting the same check that the Vat man will perform and highlighting any issues / risks relating to potential undeclared vat liabilities.

When are accounting reconciliations performed?

The most important recs should be perfomed monthly, usually after month end close.

Less important or less material accounts may be reconciled on a cyclical basis (eg, every quarter).

ALL balances should be reconciled at Financial Year End.

How long do reconciliations take?

How long's a piece of string?

Overall they will consume a large amount of team time in any Finance Department.

How much time an individual reconciliation takes can be a function of:

  • robustness of financial systems;
  • availability of reports supporting lines in the rec
  • accuracy of transaction processing during month;
  • the scale of any transaction-processing backlogs
  • ease of determining accurate cut-off at period close
  • and so it goes on....!!

Get the idea?!

> Accounting Dictionary   > Accounting Reconciliations